Addressing Competitiveness and Carbon Leakage Impacts Arising from Multiple Carbon Markets

Competitiveness and carbon leakage issues have been some of the main concerns in theimplementation and discussions of climate policies. These concerns are particularly important in thepresence of multiple carbon markets since differences in climate change policy approaches may haveimpacts on the relative competitiveness of domestic sectors in countries with more stringent policies, andon the environmental effectiveness through carbon leakage.This paper examines the macroeconomic and sectoral competitiveness and carbon leakage impactsassociated with a range of stylised mitigation policy scenarios. The scenarios reflect different depictions ofcarbon markets in terms of their level of linkages, their coverage (i.e. number of countries participating,types of gases and sectors) and the stringency of the carbon pricing policy across countries. The paper alsoinvestigates some policies to address competitiveness and carbon leakage issues. The analysis considersborder carbon adjustments (BCAs) as well as direct and indirect (offset-based) linking of carbon markets.         The results show that in presence of multiple carbon markets, competitiveness can decrease incountries that undertake climate policies, also leading to carbon leakage. The negative sectoralcompetitiveness and leakage effects can be reduced when more countries act, more emission sources arecovered, and when the climate mitigation policy is harmonised across countries. The results also show thatresponse policies, such as BCAs and linking of carbon markets, can address some, but not all, of thecompetitiveness and carbon leakage issues. While BCAs are more effective in addressing domesticcompetitiveness concerns than linking instruments, the latter are better in preserving the welfare ofcountries that are not undertaking a climate policy.      

OECD Environment Working Papers

Addressing Competitiveness and Carbon Leakage Impacts Arising from Multiple Carbon Markets

A Modelling Assessment